Tuesday, January 31, 2012

Many writers have outlined the critical success factors for product companies, like sell every unit at a profit, patent the design, and continuous product improvement. But recently I was asked about success factors for services startups, and I quickly realized that there is very little published to help the thousands of startups that fall in this category.

The distinction between product companies and services companies is easy to see. Products are tangible and can be consumed now or later, while services are intangible and have no shelf life. A product business can usually be scaled with minimal people, which can lead to enormous profits and “making money while you sleep.” Scaling services means cloning yourself.

Obviously we can find many critical success factors, like finding and retaining high-value customers, which apply to companies that are product centric or services centric. Here are a few which I believe are at least most relevant and important to the services arena:

Do what you know and what you love. If your business offers a service, like marketing or management consulting, you are the product. If you or any of your partners really don’t have the credentials, the commitment or the interest, you won’t succeed. Customers don’t like people who don’t show their passion and love for the job.

Make sure your service is innovative. Being the low-cost commodity level service provider is not a recipe for success. It’s hard to make up for a low margin by increasing your volume of work. You need to demonstrate innovative approaches, more knowledge, more productivity and superior results to get the references you need.

Networking and relationships. No expert or consultant can know everything they need to know. That’s why it is just as important that you can fill in the gaps by having the right relationship with people to back you up. Networking is the way to stay current yourself and nurture those relationships.

Clearly communicate the vision, mission, and values. It’s hard to “touch and feel” services ahead of time, to see if you are buying what you expected. Thus it’s up to you to communicate effectively what you are about, to customers as well as your own team.

Attract and retain the highly skilled and motivated people. Services people need to hit the ground running. Customers don’t like to see you learning on the job or outsourcing. Every partner and employee can kill your success potential in a heartbeat, so don’t take shortcuts on your hiring and training practices.

Define and document the service process you sell. You can’t measure, scale, or patent a service process that is not clearly documented. Even if your service is artisan based, like commercial photography or interior design, the principles, vision, and style need to be clearly communicated to your team as well as your customers.

Create and maintain the highest level of customer satisfaction. Customer satisfaction is very important for all companies, but it is everything for a services company. You don’t have tangible product items which can be compared for quality and cost in the value proposition.

In reality, every company has a services business component, if nothing more than customer service. Thus these are the critical success factors that apply to every company, rather than the ones you typically see for product companies. In addition, the statistics show that over half of new startups, perhaps as high as 75%, provide services only (no product).

Another reality is that angel investors and venture capital groups almost never invest in a services-only company. Their perspective is that these entrepreneurs need only to sell themselves, but shouldn’t need capital up front for product development or manufacturing.

That’s another reason that your services business is all about you, and what you bring to the table for skills, resources, and customers. In essence, you are the ultimate critical success factor for your business. Make it happen.

Sunday, January 29, 2012

In the world of business, you only get one chance for a great first impression. The stakes are high – you are asking an investor for money, a customer for an order, or another executive for a partnership. Badly written letters, long rambling or emotional emails, or an obvious lack of spell checking will brand you as a poor business risk before the message is even considered.

No one is born with business writing skills, and everyone can learn them. Yet this seems to be one of the most common failures I see in business professionals. I get serious letters to investors, requests for assistance, and business plans almost every day which violate the basic rules of business communication. We both lose when that happens.

Thus, I thought a quick refresher on business writing basics might help you more than any tip on the next big thing on the business horizon:

Select clear purpose and focus. Before you start writing, it’s important to ask yourself what you intend the document to accomplish. What action you want the reader to take as a result of your message? Make every word focus on that purpose. Get to the point in the first sentence, and restate it in the last.

Tailor writing to your audience. The audience makes all the difference. People subconsciously tailor their conversation, and same rule applies to writing. Consider your recipient’s motivation, culture, socio-economic status, education level, gender, and relationship to you. If you don’t know this information, aim high rather than low.

Organize toward a specific outcome. Think about the conclusions you’d like your readers to reach by the time they finish your writing. In general, you will either inform or persuade, and you should have one of these two approaches in mind as you write. Always use the same basic elements of opener, body, and conclusion.

Make it look good. A poorly formatted document, unsightly fonts, and lack of white space will kill even the best writing. Place all the parts of the message in the correct positions. Use short paragraphs for readability and spacing. Put information where your reader expects to see it. Show your readers respect, and you’ll get respect back.

Action items should be highlighted and positive. Underline action items, or even separate them in bullets to give visual cues to their importance. Readers will focus better on positive words rather than negative, so state negative messages in the most positive light to make them more palatable. Focus on what is, rather than what is not.

Develop a friendly business writing voice. This will create a sense of familiarity for readers, making them more open to what you have to say. Inject confidence, and courtesy, always using non-discriminatory language to avoid offence and apparent bias. Write at the audience reading level or below.

In general, I don’t recommend phone text messaging or Instant Messaging for business purposes, unless the recipient already knows you well. Emails are acceptable, but keep these to one page, addressed to one person, with meaningful subject lines, and use that spell checker.

Always remember that even the best written message can’t convey the body language and emotions of the sender. If the subject is sensitive or the message can be easily misinterpreted, don’t use email or anything written, but pick up the telephone or meet in person instead.

Who you are and who you can be, depend on the image your writing communicates to the mind of the receiver. That image is set more by the way you write, than by the content of your message. For business, skip the story telling and the colorful language of Mark Twain, unless you want to date your company and your savvy to his era.

Friday, January 27, 2012

Remember a term sheet agreement is not a deal until the check clears. Entrepreneurs sometimes assume an initial agreement with an Angel is a commitment, so they start spending before any money is received. But due diligence and paperwork take time, and can change everything.

It’s true that Angel investors typically do not present entrepreneurs with overly complicated deal structures, especially when compared to venture capitalists. However, there is no set pattern of terms an entrepreneur might be able to anticipate from either. Your best strategy is to bring your own term sheet to the negotiation as a starting point.

When a company is at its earliest seed stage, the terms tend to be the least complex. As the company grows and the second or third group of investors comes in, the terms of each subsequent financing grow in size, scope, and the number of lawyers’ fingerprints on them.

Based on my experience, and the book “Attracting Capital from Angels” by Brian Hill and Dee Powers, here are some key clauses that any investors expect on the first term sheet for the investment you need:

Set the price. The price is the percent of ownership given to the investor, calculated as “investment/post-money valuation.” The pre-money valuation is company value today, while the post-money valuation is the pre-money valuation plus the investment amount.

Seat on the board. This does not mean that if you have eight Angels in your company, you will have to seat all eight of them on your board. But the lead Angel would certainly ask to be given a seat.

Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. Venture capitalists and later round investors like the preferred convertible shares.

Outline multiple tranches. Investors may provide money in stages or tranches, based on defined milestones, to decrease investment risk. These “IV drip” financings may reduce risk for investors, but put more pressure on founders.

Anti-dilution protection. This clause attempts to protect the conversion price of stock of Angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “down” round. But some dilution is almost inevitable.

Right of first refusal. Angels may want the first right to purchase shares held by the other angels in the deal before they are sold to an outside party. This allows a committed Angel to consolidate his ownership, rather than see it scattered to the wind.

Liquidation preference. These are terms which basically say for the investor, “give me the option to get my investment back or my negotiated ownership, whichever is more”. It prevents the entrepreneur from selling early, at a loss to the investor.

Remember that due diligence and negotiation takes time. Not allowing enough time is one of the major mistakes made by entrepreneurs. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

In a survey for the above book, Angels reported that it takes them an average of 67 days to close, while the average closing time for venture capitalists was 80 days. This time does not include finding the right angels, which is the first and longer part of the effort.

You should expect that both parts, when combined, can take three, six, or nine months – or more. Don’t wait till your last dollar is gone before you start looking for the next one. The check won’t clear in time to save you.

Thursday, January 26, 2012

An "elevator pitch" is a concise, well-practiced description of your startup and your plan, delivered with conviction and enthusiasm, that your mother should be able to understand in the time it would take to ride up an elevator. Everybody knows about these, but few people seem to deliver a good one.

A good elevator pitch is not just for an elevator discussion. Use it in every networking situation and business conference introduction. The elevator pitch should be the first few paragraphs of your business plan, your executive summary, your investor presentation, and the first page of your web site. A different message everywhere is no message.

An elevator pitch should always contain the following key elements:

Problem-solution "hook." Open your pitch by getting the investor's attention with a hook. This is a statement or question that piques their interest to want to hear more. Good hooks succinctly define a real problem, and suggest the solution. For example, “I just patented a new cell-phone technology that will double battery life for half the cost. I need your help in getting it to market.”

About 150-225 words. Your pitch should be about 30-60 seconds (average elevator ride). Don’t think that you can just talk fast to cram 500 words into that time. It won’t work.

Obvious passion. Investors expect energy, conviction, and commitment from entrepreneurs. How do you expect them to get excited, if your startup sounds like a dull subject to you?

A request. At the end of your pitch, you must ask for something. Ask for time to give a full presentation, or ask for a referral to someone who can help.

My friend, Dave Bittner, offers a simple template to get started that will work for most products and services: “We sell [product/service deliverable] to [market niche] who want [unmet market need]. Unlike [competition], we [differentiation].” All you have to do is fill in the brackets and you have the essence of an elevator pitch.

Here are some additional recommendations to increase the impact:

Describe your product or service. Provide a one-paragraph description of what you sell. Focus on customer benefits rather than features, indicating real pain, rather than just nice to have.

Quantify the market. Make sure you clarify how large the market is, how much money they have to spend, and a positive level of growth. A product may be great, but if won’t make a business if you don’t hit customers with money to spend.

Outline the revenue model. Giving the product away, or selling below cost may make it attractive to customers, but your business won’t be attractive.

Highlight people strengths. "Bet on the jockey, not the horse" is a familiar saying among investors. Tell them the high points about you and your team's background and achievements.

Present a sustainable competitive advantage. You need to effectively communicate how your company is different and why you have an advantage over the competition. This could be a patent, key partners, domain expertise, or a better distribution channel.

Most importantly, avoid the most common mistake of turning this into a sales pitch for your product or service. The investor is "buying" the business, not the product. Tell him why and how you will run a winning business.

Consistency and redundancy are the keys to communicating any message. Another key to effective communication is practice, practice, practice early. Remember, you only have one chance to make a great first impression.

Sunday, January 22, 2012

One of the hottest buzzword for startups these days is “pivot.” The term, introduced by entrepreneur and venture advisor Eric Ries in an article on Lessons Learned a couple of years ago, is properly used to describe smart startups that change direction quickly, but stay grounded in what they've learned. They keep one foot in the past and place one foot in a new possible future.

Over time, this pivoting may lead them a bit away from their original vision, but not away from the common principles that link each step. The pivot has to leverage previous learning about customers, technology, and the environment. The alternative is more risky, simply jumping compulsively from one vision to another, and is likely to lead to a death spiral.

The pivot can be applied to any element of the business model, without changing the underlying vision. Here are some of the most common pivot elements that Eric and others have noted:

Customer problem pivot. In this scenario, you use essentially the same product to solve a different problem for the same customer segment. Eric says that Starbucks famously did this pivot when they went from selling coffee beans and espresso makers to brewing drinks in-house.

Market segment pivot. This means you take your existing product and use it to solve a similar problem for a different set of customers. This may be necessary when you find that consumers aren’t buying your product, but enterprises have a similar problem, with money to spend. Sometimes this is more a marketing change than a product change.

Technology pivot. Engineers always fight to take advantage of what they have built so far. So the most obvious pivot for them is to repurpose the technology platform, to make it solve a more pressing, more marketable, or just a more solvable problem as you learn from customers.

Product feature pivot. Here especially, you need to pay close attention to what real customers are doing, rather than your projections of what they should do. It can mean to zoom-in and remove features for focus, or zoom-out to add features for a more holistic solution.

Revenue model pivot. One pivot is to change your focus from a premium price, customized solution, to a low price commoditized solution. Another common variation worth considering is the move from a one-time product sale to monthly subscription or license fees. Another is the famous razor versus blade strategy.

Sales channel pivot. Startups with complex new products always seem to start with direct sales, and building their own brand. When they find how expensive and time consuming this is, they need to use what they have learned from customers to consider a distribution channel, ecommerce, white-labeling the product, and strategic partners.

Product versus services pivot. Sometimes products are too different or too complex to be sold effectively to the customer with the problem. Now is the time for bundling support services with the product, education offerings, or simply making your offering a service that happens to deliver a product at the core.

Major competitor pivot. What do you do when a major new player or competitor jumps into your space? You can charge ahead blindly, or focus on one of the above pivots to build your differentiation and stay alive.

In all cases, the change is not linearly adding one more new feature, in the vain hope that this one will cause traction to magically materialize. The key to pivoting is spotting trends from real data and real market experience, and optimizing the basic product/market fit, without leaving a hole or divot in your market or your credibility.

Look for multiple data points before you pivot. You have to learn that no product will satisfy every customer, so don’t make random jumps based on a single customer, friend, or negative blog article. A good internal data point or early-warning is a chronically frustrated solution team.

Get your investors and advisors to do the pivot exercise right along with you, so there are no surprises. Adaptation and dealing with chaos is the key to survival for a startup, and your best competitive edge over large companies. The down side is that it may be bad for your golf swing.